“Sell in May and go away” is a popular Wall Street adage referring to the belief that returns from October through April tend to be higher than returns from May through September. We thought it a timely topic to investigate — paying particular attention to the election year cycle.

 

The first thing to notice is that May through September contains five months while October through April contains seven. All things being equal, investments held October-April should have higher cumulative returns because they have two more months to grow. To make the periods comparable, each of the time-frames’ returns are annualized in our analysis.

 

Using the S&P 500 Total Return Index as a proxy, we analyzed each set of returns beginning in May, 1947. If we consider all 65 of the timeframes since 1947, the annualized average and median returns for October-April are 15.6% and 18.8%, respectively, while the annualized average and median for May-September are 9.5% and 7.2% respectively (see chart below).

 

 

Importantly, in addition to the lower annualized return history, May-September is also more than twice as likely to suffer returns below -20% as October-September (14% chance versus 6%).

 

However, looking specifically at the returns during an election year, we get a slightly different story. The returns for October-April in the year prior to an election are higher than those of May-September of an election year — median returns are 15.5% versus 11.3%; and average returns are 12.6% versus 9.4%. It is noteworthy that the October-April returns of the year prior to an election are lower than the October-April returns in all timeframes, while the May-September returns in an election year are higher than the May-September returns in all timeframes. However, the October-April returns of an election year are much lower than the October-April returns of the year prior to an election (median is 7.2%, average is 7.7%).

 

This brings them below the returns for May-September of an election year. The chance of a loss greater than 20% is the same at 6% for the October-April before the election and May-September of an election year; but is 13% for October-April of an election year.

 

Should investors sell in May and go away? Not based on this analysis. The returns for October-April may be higher in general, but the absolute level of returns from May-September is still good, and slightly higher in an election year.

 

Disclosure

 

The views expressed are as of 4/23/12, may change as market or other conditions change, and may differ from views expressed by other Columbia Management Investment Advisers, LLC (CMIA) associates or affiliates. Actual investments or investment decisions made by CMIA and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results and no forecast should be considered a guarantee either. Since economic and market conditions change frequently, there can be no assurance that the trends described here will continue or that the forecasts are accurate.

 

Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.

 

The Standard & Poor's (S&P) 500 Index tracks the performance of 500 widely held, large-capitalization U.S. stocks.

 

Securities products offered through Columbia Management Investment Distributors, Inc., member FINRA. Advisory services provided by Columbia Management Investment Advisers, LLC.

 

© 2012 Columbia Management Investment Advisers, LLC.  All rights reserved.